Harris Corp. F4Q09 (Qtr ended 3/7/09) Earnings Call Transcript

| About: Harris Corporation (HRS)

Harris Corp. (NYSE:HRS)

F4Q09 Earnings Call

August 12, 2009; 4:30 pm ET


Howard Lance - Chairman, President & Chief Executive Officer

Gary McArthur - Senior Vice President & Chief Financial Officer

Pamela Padgett - Vice President of Inventor Relations


Joe Nadal - J.P. Morgan

Jason Kupferberg - UBS

James Mcilree - Collins Stewart

Gautam Khanna - Cowen & Co.

Matthew Crews - Noble Financial

Chris Quilty - Raymond James

Larry Harris - CL King


Good afternoon and welcome to the Harris Corporation conference. Today’s conference is being recorded and to begin the meeting today will be Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Pamela Padgett

Good afternoon, everyone and welcome to Harris Corporation’s fourth quarter fiscal 2009 conference call. I’m Pamela Padgett, Vice President of Investor Relations and Corporate Communications and on the call with me today are Howard Lance, Chairman, President and CEO; Gary McArthur, Senior Vice President and Chief Financial Officer.

First before we get started a few words on forward-looking statements and the course of this teleconference Howard or other Management may make forward-looking statements. Forward-looking statements involve assumptions risks and uncertainties that could cause actual results to differ materially from those statements.

For more information and a discussion of such assumptions risks and uncertainties please see the press release and filings made by Harris with the SEC. In addition our press release and on this teleconference, we will discuss certain financial measures and information that are non-GAAP financial measures. Reconciliation to the comparable GAAP measures is included in the tables of our press release and on the Investor Relations section of our website which is www.harris.com. A replay of this call will also be available on our site.

With that, Howard I’ll turn it over to you.

Howard Lance

Thanks, Pam and let me welcome all of you to our fourth quarter fiscal 2009 earnings call. We posted very good financial results in the fourth quarter and for the full fiscal year, in spite of a challenging market environment. It certainly was a very busy quarter. We completed the spin-off to shareholders of the Harris Stratex Networks microwave communications business.

We also completed the acquisition of the M/A-COM wireless systems business from Tyco Electronics, launching us into the $9 billion global land mobile radio business. This business unit is now a part of our RF Communications segment, and has been renamed Harris Public Safety and Professional Communications.

We completed the acquisition of two other businesses during the quarter, which are now apart of our Government Communications Systems segment. Crucial Security and the Air Traffic Control business of SolaCom Technologies, both of these acquisitions will expand our capabilities in markets offering long term growth opportunities for Harris.

During the quarter we won two very important long term contracts in our Government Communications Systems business worth a combined potential $1.3 billion. As prime contractor for the ground processing segment of the GOES-R weather satellite program for NOAA and also for the MET program for the U.S. Army. Total backlog in this segment is now at an all time high.

In the fourth quarter we implemented a number of cost reduction actions across the company, which are expected to result in total annualized savings of $70 million to $75 million. Finally, in the fourth quarter we wrote down a majority of the goodwill and intangible assets in our Broadcast Communications segment.

When it was determined that the fair value of these assets had been reduced below our carrying value, due to the global economy’s negative impact on the Broadcast Markets and on our peer company market valuations. As a result, we will see segment amortization expense in fiscal 2010, reduced by about $20 million compared to fiscal 2009.

We entered the new fiscal year in a very strong financial position and with a number of growth initiatives, but most importantly with an improving orders picture. Orders rebounded significantly in the fourth quarter in all three of our business segments, with total orders up 22% compared to the third quarter. The pickup was most significant in our RF Communications tactical radio business where sequential orders were up 36% compared with the third quarter.

Although there are still many unknowns surrounding the timing of the global economic recovery and defense spending, visibility for the total company in fiscal 2010 has certainly improved since our last earnings call. As a result, we’ve raised the mid point and narrowed the range for our fiscal 2010 earnings guidance.

Talking about consolidated results, revenue was $1.29 billion in the fourth quarter, 4% higher than the prior year quarter. Revenue was $1.24 billion excluding the impact of acquisitions about flat with the prior year quarter. Revenue was slightly higher than expectations as a result of strong growth in the government communication systems segment in the quarter. Orders were $1.29 billion. They were $1.25 billion excluding acquisitions and as noted earlier were up substantially, compared to $1.03 billion in the third quarter. Orders were about flat compared to the prior year quarter.

Non-GAAP income from continuing operations was $120 million or $0.91 per diluted share. This non-GAAP income excluded the previously announced non-cash charges for the impairment of goodwill and intangible assets, and acquisition related expenses. However, the non-GAAP results did include $26 million in charges related to cost reduction actions across the company, and due to the Harris Stratex Networks spin-off.

Non-GAAP earnings in the fourth quarter at $0.91 per share were about $0.09 higher than the mid point of our previous guidance, primarily due to stronger revenue in government communications systems, higher operating margins in RF Communications, and lower cost reduction charges. We also had a great quarter in terms of cash flow from operations.

Let me now move on to the individual segment results. Revenue at RF Communications was $468 million in the fourth quarter. Revenue was $421 million in the quarter in the tactical radio business, and $47 million in revenue was contributed by the recently acquired M/A-COM business. This compares to revenue of $441 million in the prior year quarter.

Non-GAAP income in the quarter at RF was $144 million, and this included $4 million in operating income from the M/A-COM acquisition. The non-GAAP results for RF also included $8 million in pretax charges, and taken in the quarter related to cost reduction actions. Operating margin for the tactical radio business, if we exclude the cost reduction actions, was a very strong 35% of revenue, and the margin reflected cost reductions, manufacturing efficiencies, and somewhat favorable product mix during the quarter.

As expected, continuing strength in international markets drove higher international revenue, but it was offset by an expected decline in the U.S. For the full year, international revenue was 40% of total tactical radio systems revenue, compared with 27% for all of fiscal 2008.

As I said, the rebound in orders was very encouraging. Orders in the fourth quarter at RF were total of $441 million. This included $44 million attributable to the M/A-COM acquisition. So, tactical radio orders in the quarter were $397 million, an increase of 36% compared to $292 million in the fiscal third quarter. Orders were significantly higher in both the U.S. and internationally on a sequential basis. Orders were about flat compared with a very strong $405 million in the prior year quarter.

For the full year, tactical radio orders for fiscal 2009 were $1.21 billion. Tactical radio backlog at the end of the fourth quarter was about $470 million. Backlog in the new Public Safety Business Unit at the end of the fourth quarter was a very strong $450 million.

Department of Defense orders in the fourth quarter included $100 million from the U.S. Army for FALCON II HF and multiband radios, and for Falcon III multiband handheld radios and vehicular systems. It also included $44 million from the U.S. Air Force for Falcon III multiband handheld and vehicular radios and accessories.

It included $16 million from the Marine Corps for multiband vehicular adapters for MRAP vehicles and $15 million from the U.S. Special Operations Command for our new Falcon III 117G multiband radio.

International orders in the quarter included $53 million, from the Iraq Ministry of Interior for HF radios, $19 million from the Indonesia Special Forces for HF and multiband radios and additional major orders from the Swedish Armed Forces for HF and Falcon III secure personal radios, and from the Jordanian Armed Forces for HF radios.

Now, not only did we see a sequential rebound in orders at RF in tactical radios, but the global opportunity pipeline for tactical radio systems actually expanded. The opportunity pipeline is now greater than $3.5 million in new business expected to be awarded during the next 12 to 18 months. U.S. Department of Defense opportunities represent over $2 billion of this pipeline. A number of important factors are driving the rebound in orders as well as maintaining and growing this robust opportunity pipeline.

First, the DoD procurement process appears to us to be reenergized. During the fourth quarter, the log-jam and procurement began easing with contracts being put into place to support expanded mission requirements and more sophisticated communications capabilities. As further evidence of this renewed momentum, we are off to a very good start in this quarter, with $150 million in tactical radio orders from DoD customers already booked.

The expansion of the military force is also continuing, with smaller, more self contained tactical units operating independently, and driving new demand for our tactical radios, and increasing troop levels in Afghanistan are now leading to additional requirements for HF, and multiband radios. Harris Falcon radios meet the tough mission needs of units deploying to Afghanistan, where mountainous terrain and long distance communications put a premium on beyond line of sight capabilities, clearly a sweet spot for us.

Harris Falcon tactical radios are also being used to provide advanced communications on an expanding list of vehicles, weapons systems, and airborne platforms. These include Up-Armored Humvees, trucks, MRAP vehicles, tactical UAVs, ISR aircraft and more. We also continue to see a shift to smaller, more lightweight radios, such as our Falcon III multiband Handheld.

For example, the U.S. Air Force is increasingly using this radio to support their expanded role on security missions, Special Operations, Air Mobility Command, and Combat Engineer. The adoption of our new Falcon III 117G manpack also continues to gain momentum. We expect this to continue as the demand for high data rate communications escalates.

The Harris 117G, I’ll remind you, is the only JTRS approved and NSA approved radio in service with wideband networking capabilities. Equally important, the 117G is in production today. It’s already been Combat proven and it’s already deployed to all branches of the U.S. Armed Forces. Both the Army and Marine Corp remain very interested procuring the 117G in significantly higher quantities. We’re working with them to get new contract vehicles in place to address their very real near term operational needs.

International opportunities represent about $1.5 billion of the opportunity pipeline. The majority of these international programs are large, multiyear standardization programs, which provide significant follow on opportunities for us after their initial award. In recent quarters, we’ve won standardization programs on a long list of countries, including Mexico, Australia, Algeria, the U.K., Pakistan, Sweden, and Iraq.

We have an excellent win rate in the international Markets. We’ve got a strong international dealer network, and we continue to pursue multiyear programs throughout South America, Africa, Europe, and the Middle East. We believe our international business should represent a stable source of continuing growth for the RF Communications segment going forward.

The formation of the new Harris Public Safety and Professional Communications business unit is well underway and the feedback we’ve received from customers and prospects has been very positive to date. The combination of the former M/A-COM business with our own emerging land mobile radio business offers significant synergies for top line revenue growth and improved profitability.

The global Public Safety market is in a transition, transitioning from analog to digital technologies from proprietary to open operating systems and from single to multiband communications and improved interoperability. We believe we’ve become the clear market leader during the military’s global communications transition in these same areas, and we’re confident that our combined capabilities will allow us to gain market share in the $9 billion global Public Safety and Professional Communications market overtime.

New product development initiatives at RF Communications continue to drive new product offerings. During the quarter, Harris introduced a Falcon III based ISR video receiver, a breakthrough portable product that delivers high resolution, full motion tactical video down to individual soldiers.

The Handheld Rover, which stands for remotely operated video enhanced receiver, provides access to real-time video, captured by the military’s growing fleet of unmanned aerial vehicles. Also in the quarter, Harris received the first order for a New Digital Tactical Intercom system. The system will be installed along with our Falcon III radios in Up-Armored Humvees in support of the expanding U.S. Air Force missions on the ground in Afghanistan.

Following the close of the quarter, we also received the first real orders for our new unit multiband land mobile radio. Harris unity provides full spectrum multiband capabilities for the Public Safety market and will be available in volume production at the beginning of calendar 2010, and finally we also received a first order for our new extended frequency version of the AN/PRC-152 Falcon III multiband Handheld.

This new extended frequency version provides additional coverage in the 700 and 800 megahertz bands. It also includes the APCO 25 waveform to facilitate an even greater degree of direct interoperability between military and Public Safety users.

Turning to Government Communications Systems, Government Communications Systems segment had a very strong quarter. Revenue was $704 million, increasing 10% compared to the prior year quarter. Revenue growth was driven by U.S. Government systems and services programs across a very broad base, including the field data collection automation program for the U.S. Census Bureau, Avionics for the F/A-18 fighter aircraft several National Intelligence Programs, and IT services programs for the U.S. Air Force and National Reconnaissance Office.

Revenue also benefited from new healthcare IT programs and from crucial security, our cyber acquisition, which provides forensic IT Security Solutions and analysis for U.S. Government customers. Segment operating income was $77 million in the quarter. This result included pre-tax charges of $3 million for cost reduction actions. Excluding these charges operating margin was a solid 11.5% of revenue.

During the quarter, we also acquired the air traffic control business unit of SolaCom technologies based in Canada. The SolaCom acquisition provides Harris the ability to address all of the relevant segments of the air traffic control voice and data systems market. It also improves our position to support the FAA next-generation air transportation system architecture.

Our commercial reflector enterprise continued to make progress during the quarter. We’ve now made final delivery on seven of the radio rib design reflectors. We are under a stop work order on the eighth and find all reflectors for reasons unrelated to Harris. Two of these reflectors were recently launched and are in full operation. The two remaining hoop design reflectors also saw good progress during the quarter and remained scheduled to be delivered in fiscal 2010.

In May, our Government Communications Systems business was awarded a 10 year potential $736 million contract to provide a complete end-to-end solution including services for the ground segment of NOAA’s new weather satellite constellation, called the Geostationary Operational Environmental Satellite Series-R program. GOES Satellite provide the images and time lapse video sequences commonly seen in weather forecasts, and they serve as the primary tool for detecting and tracking severe weather.

Harris will design, develop, deploy, and operate all GOES-R ground processing, which will receive and analyze 40 times more data than the current system, and this weather data will be distributed to more than 10,000 direct users. Also in the quarter, Harris was awarded a 10 year potential $600 million contract for the U.S. Army Modernization of Enterprise Terminals program.

These next-generation earth stations will provide the worldwide backbone for high-priority military satellite and missile defense communications. Harris will replacing the program up to 80 aging current satellite terminals around the world, with new X- and Ka-band terminals capable of interfacing with the new Wideband Global Satellite constellation.

Major wins in our IT services business in the fourth quarter, included a potential $32 million, five year modernization program for the U.S. Air Force weather agency and a potential $19 million five year program to provide service desk support for the FAA Office of Aviation Safety.

In the Healthcare Solutions market, we signed a multi-million dollar contract with Siemens Healthcare, to provide picture archiving and communications systems disaster recovery software. These new program wins increased our total funded and unfunded backlog to a record $5.2 billion at the end of the quarter, and that’s a new high for the Government Communications Systems segment.

The core business in this segment is growing and new initiatives in Healthcare Solutions and Cyber are also contributing to growth. We believe this business can continue to provide above market growth rates, as well as excellent predictability, profitability and technology innovation.

Revenue in the Broadcast Communications segment was $130 million in the fourth quarter, about flat sequentially with the third quarter and down 25% from the prior year fourth quarter. The weak global economy continues to negatively impact advertising and Broadcasters continue to pair back capital investments, as a result.

Orders improved significantly on a sequential basis; however, representing the real bright spot in the quarter. They were up 18% in the fourth quarter compared to the third quarter, rebounding in the U.S. and across all the major international markets including Europe, the Middle East and Africa, Latin America, and Asia Pacific.

Our book-to-bill ratio was nearly one in the quarter and suggests that the decline in revenue may be reaching a bottom. Having said that, we’re remaining very cautious, and right now expect Broadcast Communications revenue in the first half of fiscal 2010 to be very similar to the second half of fiscal 2009.

The non-GAAP segment loss in the fourth quarter was $2 million, but keep in mind that this result included $8 million in charges in the quarter for cost reduction actions at Broadcast. Our ongoing cost reduction actions are clearly helping to mitigate some of the impact of the lower revenue, and along with the lower amortization expenses going forward, should allow for improved operating performance and higher returns when the market conditions improve.

Even in this week global economy, Harris continues to have success in deploying our one solution for interoperable workflow. In addition, we continue to gain traction in several growth areas including digital signage solutions and full-motion video applications for government customers.

With that overview of the segment results, let me turn the call over to our Chief Financial Officer, Gary McArthur.

Gary McArthur

Good afternoon, everyone. Thank you, Howard. Fiscal year 2009 was another very solid financial year for Harris. We ended the year with $281 million of cash and cash equivalents on hand. We generated $667 million of operating cash flow, $545 million of free cash flow, repurchased $132 million of our outstanding stock, and paid $107 million in dividends.

As Howard mentioned, we successfully completed the spin-off of Harris Stratex Networks and the acquisitions of Tyco Electronics Wireless Systems business, Crucial Security and the ATC Business Unit of SolaCom Technologies. Ultimately these acquisitions were funded with $350 million 10 year term debt at an interest rate of 6.375%, which we issued in early June, approximately $280 million of cash on hand, and $106 million of commercial paperbacked by our revolving credit facility.

None of our outstanding long term debt comes due prior to October 2015 and as of year end we had $644 million available under our $750 million revolving credit facility. Our liquidity position was excellent. Further as of year end, our return on invested capital was more than twice our cost of capital and improved 200 basis points to 19.4% as compared to 17.4% as of the end of fiscal 2008.

As for the fourth quarter we had a very good cash flow quarter. Cash flow generated from operating activities was $262 million as compared to $198 million in the fourth quarter of fiscal 2008. This was driven by good working capital management at RF and Broadcast and exceptional performance at Government Communications Systems.

Capital Expenditures were $25 million for the fourth quarter as compared to $37 million in the fourth quarter of fiscal 2008. Free cash flow for the quarter was $237 million, one of our strongest quarters ever. Depreciation and amortization was $55 million in the quarter as compared to $46 million for the fourth quarter of the prior year.

During the quarter we did not repurchase any shares. Total shares repurchased during fiscal 2009 were $2.7 million. As of year end we have $650 million of availability under our share repurchase program. Our priorities for excess cash continue to be in the order of priority, internal investments, acquisitions that further our strategic objectives and increase shareholder value, the payment of competitive dividends and share repurchases.

Our full year tax rate for fiscal 2009 was 31.4%. Current guidance for fiscal 2010 is as follows. Cash flow from operations in the range of $525 million to $575 million, depreciation and amortization of $160 million to $170 million, and capital expenditures including capitalized software of $150 million to $160 million. Our tax rate is expected to be 34% for the year with expectations for the first quarter of 35% to 36%.

Back to you, Howard.

Howard Lance

Thanks, Gary. So let me conclude my remarks with an updated view towards our full year fiscal 2010 earnings and revenue. We’ve revised our guidance for non-GAAP income from continuing operations for fiscal 2010 to a new range of $3.40 to $3.50 per diluted share, compared to a previous range of $3.20 to $3.50 per share.

So that’s an increase of $0.10 per share at the mid point of the range, with $0.05 coming from higher revenue and income expectations at Government Communications Systems, and $0.05 coming from more accretion from M/A-COM acquisition due to lower interest expense. As guidance excludes acquisition related costs.

Revenue in fiscal of 2010 is now expected to be in a range of $5.0 billion to $5.1 billion. The outlook for RF Communications is unchanged from our previous guidance for now, but we are certainly encouraged by the recent DoD orders improvement and near term demand across both the Falcon II and Falcon III product lines. RF Communications segment revenue in Fiscal 2010 is expected in a range of 4% to 6% higher than fiscal 2009, of course, including the contribution of the new Public Safety and professional communications business, at about $500 million.

Segment operating margin is expected to be in a range from 25% to 27% of revenue. The tactical radios business revenue within those numbers for fiscal 2010 is expected in a range of $1.3 billion to $1.4 billion, with operating margin in the range of 32% to 33% of revenue. The outlook for the Government Communications Systems segment has improved with revenue in fiscal 2010 now expected to be about flat with 2009.

If we back out the previously discussed wind down in the FDCA program at the Census Bureau, to remind you that’s a revenue drop from about $350 million in fiscal ‘09 to about $120 million in fiscal ‘10. Of course, also exclude the contribution of the two small acquisitions; revenue guidance for the segment represents very strong underlying organic growth of 8% to 9% for the rest of the business compared to last year. Government Communications Systems margins are expected to remain strong in a range from 11.5% to 12% of revenue.

Our outlook for Broadcast Communications is unchanged from our previous guidance with revenue in a range of $565 million to $585 million. Operating margin at Broadcast has been raised. It’s now expected to be a range of 8% to 10% of revenue, with the increase from previous guidance primarily attributed to $20 million less amortization of intangible assets.

With all of that as background, we’ll now ask the Operator to open the line and take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Joe Nadal - J.P. Morgan.

Joe Nadal - J.P. Morgan

On the RF sales outlook for FY ‘10, you have a $470 million backlog going into the year, historically your sales have been 2X or less, 1.7X to 2 X, that number, which would put you if that held consistent in the $900 million or lower range, but you’re maintaining the 1.3 to 1.4. I see the orders in the quarter in the book-to-bill, was about one and you’ve had a good start to the year with a 150, but I’m still sort of wondering how you got there and why the historical relationship might be broken. Could you maybe dig into that a little bit?

Howard Lance

Historically, when you have a very, very large backlog, your revenue is going to be coming from two different sources: New orders that you get during the year, as well as backlog that you eat up during the year. As we discussed on the last call, we’re down to a point at the end of the fourth quarter around $470 million in tactical radio backlog. It could go perhaps a little bit lower, but we’re pretty much at a point where I expect orders in FY ‘10 to be at or above orders or revenue in FY ‘10.

So our guidance of $1.3 million to $1.4 million assumes that we’ll have new orders of 1.3 million to $1.4 million and that backlog will stay at about the same level, plus or minus. It’s not precise whether it needs to be at 400 or 500, but our current guidance does not expect a very large backlog build during the year. Obviously, we get more orders either we’ll have higher revenue or higher ending year backlog.

Joe Nadal - J.P. Morgan

I’m wondering you gave another metric, which was the 40% international versus the 60% domestic for this past year it was 27% year before. I’m wondering, maybe if you could give your expectation just to what that might be in this year. I know you haven’t given it before, but any color within the domestic piece by service, particularly Army and Marines?

Howard Lance

Well, the first question. I think on the last call I indicated, we expected revenue in FY ‘10 out of this total guidance for tactical radios of $1.3 million to $1.4 million. Probably we would see international be slightly higher than DoD. So, that 40% would go up to 50% or maybe a few points higher than that.

Obviously, it has to do with where we get the orders and also priorities of shipment, but I do expect the international, domestic piece to kind of come into balance around 50/50 for the year or thereabouts.

In terms of any color; no real specificity I can give you by service, but it’s clear that the Army has become a more important customer to us over the past three or four years than they were previously. We certainly expect that to continue. So, I would certainly expect the Army to be the largest piece of DoD, but no real specific breakdown by service. We’ll continue to at least talk about the major orders on a quarterly basis, as we did on this call.

Joe Nadal - J.P. Morgan

Then just one more on M/A-COM; the margins at Tyco before the acquisition closed were lower this year. I know they were higher in previous years, but they were a lower single digits this year Ex the charges and they actually was I think a loss in this quarter before the acquisition date a 20 million or so operating loss. You’d got your sort of high single digit margin here. I guess continuing to expect that.

I guess why were the margins lower and even negative before the acquisition? What’s getting into the sort of that 10% range ex-amortization this coming year?

Howard Lance

Well, first of all let me reiterate what our expectations are for this year, Joe. It’s in the 8% to 10% income to revenue. In that, we are absorbing about five points of charges for amortization intangible. So, that equates to about a 13% to 15% kind of cash earnings return on revenue.

That’s pretty consistent with, if you look back over the trend of the last two or three years. In a given quarter in this business, you’re going to see a mix of products that is radios or terminals if you will versus the mix of systems. We’ll have some impact quarter-to-quarter on the gross margin and therefore the operating income.

Speaking to what happened in the Tyco numbers, pre-our-acquisition. I’m not really going to comment on that, other than just say there were a lots of balance sheet activities that were flowing through the segment prior to our acquiring the assets of the business.

You’ll recall it was an asset acquisition, as opposed to a stock acquisition. So, that certainly had some impact on activities they were doing in the quarter prior to the hand-off of those assets to us at their proper value.

Joe Nadal - J.P. Morgan

Gary, I think you said the tax rate for the year and I missed it for the full year.

Gary McArthur

Full year 34%; we are saying that the first quarter will be more like 35% to 36%. So, obviously lower than in the subsequent three quarters, but overall for the year, 34%.


Your next question comes from Jason Kupferberg - UBS.

Jason Kupferberg - UBS

I wanted to start with a question on RF Comm and it was encouraging to see the Iraq quarter in particular come through that $50 million piece, because I think you guys had indicated last quarter that you thought that total 250 or so opportunity out of Iraq would get broken up and the $50 million piece would be first.

Did that piece come through a little sooner than you expected? If it did, is there any change in your thinking regarding when the remaining 200 million or so of order potential out of Iraq could occur?

Howard Lance

Jason, it actually was good news for a different reason. It was $50 million from the Ministry of the interior, so it means we still have the opportunity pipeline for the additional kind of first $50 million order from the MOD. With regard to timing, I don’t want to try and call that. I’m probably not, we’re not close enough to getting it, but we still think that it’s going to occur in 2010.

Jason Kupferberg - UBS

On the 117G order out of DoD that had been cancelled and then you were looking for a new vehicle there, I know that was not expected to be a near term event, but any greater clarity on how the procurement process or strategy is going to work on that?

Gary McArthur

Without any competitive details, clearly, the work is in progress. We still expect to see a new contract and an initial order under that contract and in May we indicated on the call six to nine months. That would put it in Q2 or Q3 of fiscal ‘10 that kind of a time range still seems to be reasonable.

Jason Kupferberg - UBS

Then on the Tyco acquisition side, I think you use some of the same language in today’s press release as you’ve used in the past regarding, did the potential accretiveness in fiscal ‘11 and fiscal ‘12 you’ve described it as significant. Anyway to kind of ring-fence that for investors in terms of order of magnitude now that you’ve had a chance to close the acquisition and probably work through a little bit more cost cutting and synergy planning?

Howard Lance

Most of our focus has been on fiscal year ‘10. Last call, we talked about what does slightly accretive meant and we said about $0.03 or $0.04 a share, as a result of coming in with lower interest cost than we had expected, that’s an increase now of five more or so we’re at $0.05 to $0.09 so starting to become I think materially helpful in this years outlook. We expect to be higher than that in 11 and 12 and we’ll certainly come back and try and quantify that for you in the future.


Your next question comes from James Mcilree - Collins Stewart.

James Mcilree - Collins Stewart

On the International RF, I’m a little bit confused by that. The fiscal ‘09 International RF revenue looks like it was about $700 million and then it sounds like you’re talking around $650 million or so in fiscal ‘10, but everything you’ve been saying about international has said it’s growing quickly, it’s very strong and just trying to reconcile the qualitative comments about a strong market with the quantitative expectations of a flat to down year.

Gary McArthur

First of all, ‘09 is about right. It was a little bit less than $700 million and so we’re providing this range of next year at 1.3 to 1.4 for total tactical radios and then the other variable is what was the mix be between International and DoD. So, we’re expecting some year-over-year growth in revenue from international.

Whether that means it is 50% of the year or slightly higher than that, I think that we’re just kind of parsing a little bit too much specificity. Right now, I guess mainstream down our guidance you’d probably come up with international being 55% or something like that of fiscal year ‘10.

We certainly are expecting year-over-year growth in international, but at this point, I think looking at what we know and what we believe and not trying to overextend our expectations for that, but we would expect revenue to be up in 10 versus nine whether that will be double-digit up or single-digit or strong double-digit, it depends on two or three big orders that we’ve talked about in the past in terms of the timing of these major standardization programs in Iraq, in Pakistan, in Mexico, in Australia, and so on.

James Mcilree - Collins Stewart

Then just back on Joe’s question about where the revenue comes from in fiscal ‘10 in RF in the U.S., without necessarily characterize, well if you want to give the specific programs that would be great, but if you can’t, can you kind of characterize maybe size of programs that are generating the revenues that you’re looking for because it sounds like it’s by definition it has to be really quick turn business. So it sounds like it’s a lot of little stuff rather than one or two big things and I’ll stop with that? Thank you.

Howard Lance

Yes. I think you’re exactly right and we probably haven’t spent enough time in the past talking about how much of our revenue in both DoD and international. It’s just kind of recurring small orders replacements, upgrades that they aren’t big enough in an individual order to come to the attention and in a press release, but yet in aggregate, in any given quarter they can make up 20% or as much as 30% of your aggregate business.

For example, for DoD last year, I think we had something like 3000 separate orders for tactical radios. So if you kind of divide that into your number for revenue, it’s a relatively small order quantity, so for every one of these big $50 million orders we talk about there’s a whole lot of 100,000, 200,000, 500,000 orders, and coming from lots of different places.

So the overall run rate of that business has been growing and as we get more installed base, there’s more radios to replace and upgrade and upgrade software for and add vehicle adapters to and other accessories to and the same is true in international. I think our international orders were something like 800 individual orders. So you’re talking about again less than $1 million in orders. So we talk about the big ones, but there’s this whole large aggregation of small ones that are material.

I think probably the most significant other color I could give you, and back to Joe’s question, is we have really listened to your questions relative to where is all of this funding coming from, and we’ve looked at our pipeline and literally are looking program-by-program and order-by-order with where’s this money going to come from.

Our bottoms up analysis adds up to $1.5 billion of funding that’s already been approved and not spent that we believe will go toward one way or another tactical radio systems. So $1.5 billion from a combination of the ‘08 base budget, the ‘09 base budget, the ‘08 supplemental, the ‘09 supplemental and a minority amount that’s currently in the FY ‘10 proposed budget, but if you add all that up we think it’s about $1.5 billion. We don’t expect to get 100% of that, but the bottom line is we believe that the funding is already in place for our expectations for FY ‘10 and the majority if not all of FY ‘11.

So we’re just feeling a lot better today than we were six months ago when we really didn’t have any visibility. So without going into individual programs, which I’m not going to do from a competitive standpoint, hopefully at least that gives you some color around our overall feeling on the magnitude of not wish money, but money that’s already been funded, appropriated and approved and is available through a variety of line items and programs, vehicle programs, weapons systems, ISR programs, as well as individual tactical radio line items. So hopefully that provides a little more color to our outlook.


Your next question comes from Gautam Khanna - Cowen & Co.

Gautam Khanna - Cowen & Co.

I want to know, how much of that pipeline is [Inaudible]?

Gary McArthur

I don’t know the answer to that question. Today since the programs of record are not in production, there wouldn’t be any technically “requirement” for a JTRS radio because they aren’t in production. Of course what we’ve done is to introduce products that have many of those features that are in the programs of record well in advance of them being available.

We’ve gotten the support of the commands and the boots on the ground because they’re using the functions whether it’s TacSet or wideband networking, that’s why we are able to get it through NSA and get their support and get approval of testing and approval by the JTRS program executive office, but technically I think the answer would be zero, because the JTRS programs record are not expected to be in production during that 18 month timeframe. That’s just my reaction to your question. It may or may not be precise.

Gautam Khanna - Cowen & Co.

And the ATV [Inaudible], give me some broad substance of what the potential content used to be.

Howard Lance

I’m sorry, I didn’t quite hear your question, but was it relating to our potential content on the MRAP-ATV?

Gautam Khanna - Cowen & Co.


Howard Lance

Well certainly, we think there’s significant opportunity there, but I’ll refer you back to our success in the last round of MRAP procurements. We did very well on essentially all of the Marine Corps business. The Army business was HF. We shared some of the multiband business and didn’t get any of the VHF business.

So, that’s kind of a starting point. We certainly hope to do that well, but it remains to be seen if we’ll win those competitions, but that’s one of many orders and opportunities in this pipeline, certainly one that we’re working on.

Gautam Khanna - Cowen & Co.

Lastly, if I recall the program office that’s already out there in July, can you update us on what’s the status is there? How they might proceed?

Howard Lance

I’m not aware of any other action that’s been taken other than that RFI coming out. So, I don’t really have anything more to add at this point.


Your next question comes from Matthew Crews - Noble Financial.

Matthew Crews - Noble Financial

Switching gears to the Government Communication Systems. I wanted to know with your exposure to the FAA, if you had any plans with the National Airspace Systems, NISC, the implementation support contract, if you had any plans there, any color there?

Howard Lance

I’m sorry I’m not familiar with that particular NISC program name. Is this a program that is being pursued or has already been awarded?

Matthew Crews - Noble Financial

Lockheed is the current prime; it should run out in February of 2010.

Howard Lance

It’s possible that I know it under a different acronym here. That acronym doesn’t ring a bell with me, but there certainly are a multiple FAA pursuits that we’re in process on, that would be incremental meaning, we’re not incumbents on, but that particular acronym I’m sorry, I don’t recognize.

Gary McArthur

I believe it’s a piece of what we call next-gen, and yes, it is part of where we are moving forward and pursuing.


Your next question comes from Chris Quilty - Raymond James.

Chris Quilty - Raymond James

Last weeks print addition at least of defense news though, I couldn’t find it online had an interesting article, U.S. seeks JTRS style networking ability today, and the article goes on to talk about the fact that you have JTRS approved equipment. It also talks about some Raytheon [Eplar] solutions. I’d haven’t heard anything about that being a standard program.

Is this something that, well, that might be a tangible near term opportunity?

Howard Lance

Chris, I think that our view is that momentum is building and that as we ship more radios that have the capabilities first of our wideband handheld and now our wideband Falcon III 117G, as more of them are put in service. The users see what they can do with them that they can’t do with the legacy radios and this is going to build more and more demand. Clearly that’s our hope and our long term strategy to participate in the JTRS market for a long, long time. So, I don’t have any event to report, but my view is that momentum is building.

Chris Quilty - Raymond James

A follow up on the MATV question; if you can just recap regarding the MRAP that’s already passed. You listed off the wins and losses. What percent of the dollar volume do you think you grabbed on that old program and second part of the question for the MATV. Do you know if the communication suite is part of the budget or does the budget for the program just, is it the shell? In other words, is there funding where they are going to be buy a new radios, or might they try to swap out equipment-off of vehicles leaving theatre from Iraq in order to outfit new vehicles going out?

Howard Lance

The second question, I don’t know the specific answer to your question. I know there are MRAP opportunities, but I don’t know the size of it, but I think it’s really only starting to come into focus. On the first question, I don’t know specifically what our market share was. I think it was very high in HF. Overall it was, maybe half in multiband or something like that and it was essentially zero in VHF, which is the biggest number. So my guess is overall, it was well under 50%, but that’s an anecdotal response to your question. I don’t know a specific answer.

Chris Quilty - Raymond James

I’ll throw out one bone for Tim on the Broadcast business. The upturn in sequential orders here does that signify a bottom or were there specific large singular orders in the fourth quarter that sort of skewed this as looking like something of a bottom and a V-shaped rebound?

Howard Lance

There weren’t a large number of big orders in the quarter. In fact, a couple we had hoped to get got pushed out. So I am very hopeful and Tim is hopeful that it’s a bottom, but I’m not calling for a major rebound at this point. We did $130 million in revenue, or whatever and about the same in orders. I am hoping that, we can stabilize there, at least in the first half of fiscal ‘10 with lower amortization and the result of that cost reductions, that should give us a little better profit year-over-year and better in the first half of ‘10 than the second half of nine.

Then we’re hopeful in the second half as we get into calendar year ‘10 that things pick up a bit, but whether they do or not, I would say that’s certainly one of the reasons why we have a range in our guidance, we’re not counting on it, but we’re hopeful. We have some growth programs that we’re hopeful we’ll give even in this climate truly incremental new business with those programs especially in the couple of areas I mentioned of the digital signage and the government applications for full motion video, storage retrieval, and analysis.

Chris Quilty - Raymond James

Just for Gary, that’s a pretty big jump the eight to 10 EBIT margins full year. Does it look fairly linear on a quarter-over-quarter basis in terms of the margin expansion and would that imply, you’re North of 10% by the fourth quarter?

Gary McArthur

I’m trying to go back and understand. So you’re referring to the Public Safety business?

Chris Quilty - Raymond James

No, didn’t you say full year Broadcast?

Gary McArthur

Broadcast. Yes, it is definitely going to improve as the year goes on and we’ll be more backend, so it won’t be as linear, but we will expect improvement throughout the year.

Howard Lance

I think we’ve been consistent over the years and saying that even with all of the costs we’ve taken out, Chris, to get North of 10% ROS in that business on a continuing basis, we need a little more revenue than $130 million a quarter. So we’re clearly counting on an uptick in the second half and would not expect margins to be at 10% in the first half of the year.


Your last question comes from Larry Harris - CL King.

Larry Harris - CL King

Just a couple of questions here, what’s your current understanding relative to the Jitters program of record, the competition to the 117G? Is that still expected in the 2011-2012 type timeframe?

Howard Lance

I have heard nothing different in that, Larry.

Larry Harris - CL King

Then a quick question for, Gary certainly, did extremely well in terms of cash flow generation and 2009. Looks like the numbers for 2010 will be somewhat less. Is that related to investments in the former Tyco business? Or why is the 2010free cash flow while still very positive less than 2009?

Howard Lance

There’s really a couple of pieces to it. One is operating income right now; we are forecasting to be lower by about $67 million in that kind of ballpark so some of it is just operating income is lower. The other piece of it is since we are not seeing the volume of business at either the Broadcast or the RF Communications area we were a little hesitant to keep our inventory turns, where they have been so maybe it’s a little bit of conservatism.

The two pieces are about 60 plus million of its lower operating income, the $50 million delta to get you to the mid point of our guidance is a little bit of conservatism on inventory returns, the overall global economy, people paying a little slower, and a lot of our business now moving into the international market as well has got us of a belief we may not be as able to collect as fast as we have, but we hope to be able to prove ourselves wrong and do better, but that’s what we are thinking when we moved into the year.

Pamela Padgett

Thank you, everyone for joining us. Appreciate it

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